Similarly, a change-in-control provision could specify that if all stockholders receive stock of an acquiring entity upon a change in control, the contract will be indexed to the shares of the purchaser (or issuer in a business combination accounted for as a pooling of interests) specified in the business combination agreement, without affecting classification of the contract.
(P) December 16, 2026; (N) December 16, 2026
105-10-65-10Similarly, a change-in-control provision could specify that if all stockholders receive stock of an acquiring entity upon a change in control, the contract will be indexed to the shares of the purchaser specified in the business combination agreement, without affecting classification of the contract. In the event of nationalization, cash compensation would be the consideration for the expropriated assets and, as a result, a counterparty to the contract could receive only cash, as is the case for a holder of the stock underlying the contract. Because the contract counterparty would receive the same form of consideration as a stockholder, a contract provision requiring net cash settlement in the event of nationalization does not preclude equity classification of the contract.
The entity (the buyer) purchases call options that provide it with the right, but not the obligation, to buy from the seller, shares of the entity's stock at a specified price. If the options are exercised, the contract may be settled by physical settlement, net share settlement, or net cash settlement, or the issuing entity or the counterparty may have a choice of settlement methods. The entity should follow the preceding table in accounting for purchased call options.
This Example illustrates the application of the guidance beginning in paragraph
815-40-15-5for a financial instrument that includes a down round feature. Entity A issues warrants that permit the holder to buy 100 shares of its common stock for $10 per share. The warrants have 10-year terms and are exercisable at any time. However, the terms of the warrants specify both of the following:- a
If the entity sells shares of its common stock for an amount less than $10 per share, the strike price of the warrants is reduced to equal the issuance price of those shares.
- b
If the entity issues an equity-linked financial instrument with a strike price below $10 per share, the strike price of the warrants is reduced to equal the strike price of the newly issued equity-linked financial instrument.
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One Settlement Method Entity Choice Counterparty Choice Physical (a) Net Share Net Cash Net Share or Physical(a) Net Share or Net Cash Net Cash or Physical(a) Net Share or Physical(a) Net Share or Net Cash Net Cash or Physical(a) (1) Initial Classification: Equity (b) x x x x x x Asset or Liability x x x \"(2) Initial Measurement, Subsequent Classification and Measurement:\" \"Fair value, permanent equity-no changes in fair value(b)\" x x x x(c) x(c) x \"Fair value, asset or liability- adjusted for changes in fair value (d)\" x x(e) x(e) (a) Physical settlement of the contract requires that the entity deliver shares to the holder in exchange for cash. (b) Equity or temporary equity classification is only appropriate if the conditions in Section 815-40-25 do not require asset or liability classification of the contract. (c) \"If the contracts are ultimately settled in net cash, the amount of cash paid or received should be reported as a reduction of, or an addition to, contributed capital.\" (d) Subsequent changes in fair value should be reported in earnings and disclosed in the financial statements. (e) \"If the contracts are ultimately settled in shares, any gains or losses on those contracts should continue to be included in earnings.\" \"Note: In all cases above, the contracts must be reassessed at each reporting period in order to determine whether or not the contract must be reclassified.\"